A green economy, one that promotes clean energy, reduces pollutants and greenhouse gases, requires an intersection of government regulation, business and innovation in both technology and public policy. Goldman School Professor Lee Friedman, postdoctoral fellow Hanna Breetz and Professor Michael O’Hare are diving into the complexities of regulation, business innovation and investment. Their research has direct bearing on policy today and is helping to shape a greener tomorrow.

California’s Global Warming Solutions Act (AB32), aims to reduce greenhouse gas emissions to 1990 levels by 2020. It is groundbreaking and ambitious legislation that has set into motion new policy and regulatory efforts. But 2020 is less than a decade away. What happens after that?

“For green business investment, it is important for the State to be clear about what kinds of emissions reductions it is going to require in the 2021-30 period,” says Professor Lee Friedman. “People who are making large scale investments now in things like new commercial buildings, need to decide whether the money they invest in making it green will repay itself in lower bills in the future. This is tied directly to emissions goals. If CA did nothing after it achieves its 2020 emissions goals, there would be no incentive to continue to reduce emissions. If the price of emission allowances increases steadily through continued regulation, however, it incentivizes investment in green business.”

Professor Friedman is the author of “Electricity Pricing and Electrification for Efficient Greenhouse Gas Reductions,” a study which recommends that California’s Air Resources Board (CARB) include a section about the years 2020-30 in its upcoming scoping plan. The recommendation was adopted by CARB in the draft of the plan.

“It’s a critical first step,” says Professor Friedman. “It tells green business investors that the system is going to continue for a long time.”

Professor Friedman’s report also encourages California to pay greater attention to linkages and partnerships with other jurisdictions.

“Because climate change is a worldwide problem, it doesn’t make sense for California to make vigorous efforts to fight climate change on its own,” he says. “The more partnerships and linkages there are, the better things are for green business.”

Since the report’s recommendation was released, California has forged a formal link with Quebec, allowing (among other things) the acceptance of one another’s greenhouse gas allowances. Recently, California Governor Jerry Brown signed a memorandum of understanding (MOU) with China, making the State the first sub-national government to sign an MOU with China. The MOU provides for cooperation and partnership in the exchange of personnel, the sharing of trading systems information and adopting linkages that will help expand green business worldwide. Additionally, California has joined with Oregon, Washington, and British Columbia in the Pacific Coast Action Plan on Climate and Energy in an agreement to create a regional carbon price, harmonize long-term reduction goals, set mid-term interim targets, and use similar rules to encourage greener transportation.

Finally, the report recommends the introduction of time-of-use pricing, which calibrates the price of (in this case) electricity to demand.

“Time-of-use pricing will unleash the market for investors in technology to store electricity because it will pay to fill up batteries at night when the electricity is cheaper and cleaner,” says Professor Friedman. “Whole new industries will be created, including demand responsiveness programs that briefly reduce the flow of energy to customers for short periods of time and then aggregate that energy to meet demand in peak times without relying on polluting generators.”

As a doctoral student at MIT, Ms. Hanna Breetz became interested in the relationship between policy innovation and the commercialization of green technology, particularly biofuels.

“The energy sector is typically divided between the power and transportation sectors,” she says. “In transportation, the focus is mostly on liquid fuels, an area where change is especially hard. Finding substitutes for petroleum is a tough nut to crack.”

As part of her doctoral dissertation, Ms. Breetz’s research included process tracing, which aims to understand a sequence of events that results in a particular outcome. Her dissertation focused on the “crash programs” to develop petroleum substitutes wrought by the oil crises of the 1970s and the 2000s. She now brings that expertise to the examination of biofuels.

In a joint postdoctoral appointment with the Goldman School and Berkeley’s Energy Biosciences Institute (EBI), Ms. Breetz is examining the political processes and policymaking related to ethanol. In a project that is just underway, she compares four fuel policies: CA’s low carbon fuel standard, the Renewable Fuel Standard and two policies in the European Union. All four policies are trying to catalyze the commercialization of new fuels, using (depending on the policy) mandates, performance standards and penalties for noncompliance and/or annual targets.

Three of the four policies are biofuel specific.

“The biofuel supply chain is very complicated and pulls together a lot of different actors (farmers, refiners, blenders, transporters and retailers) all of whose investments must be coordinated to get new biofuel to commercial scale,” says Ms. Breetz. “Most policies affect one node of the supply chain and assume the incentives will percolate upstream and downstream. But I’m not convinced that’s true.”
Ms. Breetz plans to take a value chain approach to understanding how market structures mediate the impact of policies, an approach that could challenge existing assumptions about how markets work.

“Economists assume that the most elegant and efficient policies are the ones that let the market decide. You shouldn’t ‘pick winners.’ But there is a small-but-growing body of literature on the history of energy transitions that is increasingly making the point that when you want radical innovation as opposed to marginal improvements, there needs to be some picking of winners. Innovations cost a lot, so if you want to encourage people to adopt them, there may have to be targeted rather than market-oriented policies. Market-oriented policies are theoretically more efficient but may end up directing resources to short-term marginal solutions rather than long term radical solutions.
In her other research project, Ms. Breetz applies her expertise to examine California’s Renewable Fuel Standard (RSF), the Low Carbon Fuel Standard (LCFS) and the relationship between policy and business.

“The RSF is an important and incredibly controversial biofuel policy,” says Ms. Breetz. “Both the RSF and the LCFS are policies with life-cycle based greenhouse gas thresholds, meaning that the greenhouse gas emissions are calculated over the full lifespan of that power source, from groundbreaking to waste management.”

One of the key components of the RSF is that it takes into consideration Indirect Land Use Change (ILUC), the unintended consequences of releasing more C02 as more and more farmland around the world is devoted to growing (for example) corn to be turned into ethanol.

“The ILUC presents a fascinating policy making case,” says Ms. Breetz. “Typically, some degree of scientific consensus exists for years or decades before there is policy. In this case, policy has gotten ahead of scientific modeling. Now that it’s been written into the policy, the modeling itself becomes politicized. What does this mean for the development of modeling? For policy effectiveness? For environmental outcomes? These are the kinds of questions I hope to answer.”

Professor Michael O’Hare first became interested in biofuels in 2006 when he joined Professor Dan Kammen and Professor Alex Farrell at the Energy Resources Group. He eventually co-authored a paper on how ethanol can contribute to meeting energy and environmental goals. But the ILUC changed everything in how Professor O’Hare thought about biofuel, especially corn-based ethanol.

“The only way to get corn to make ethanol is to outbid someone who would use it for corn flakes or cattle feed,” he says. “That means corn price goes up on international commodity markets. Increasing corn prices will cause more corn to be planted instead of soybeans, and there will be less of both to be exported. In places like Brazil, someone will cut down and burn a bit of rain forest and plant grass to accommodate cattle that has been displaced to grow more soybeans -- the price of which has gone up because everyone is planting corn. It’s like a row of dominos falling.

“The carbon discharge from clearing that forest drastically reduces the carbon advantage of using corn as fuel,” continues Professor O’Hare. “California’s Low Carbon Fuel Standard needs a number attached to every fuel that reflects the grams of C02 (or equivalent) released per unit of energy in the fuel: this number needs to reflect the carbon released that was not part of the original corn farmer’s intention.”

Professor O’Hare research, funded by the Air Resources Board that implements the LCFS, has to do with a variety of policy issues related to getting this number right, but also accounts for how much uncertainty to include. “Should it be, for example, +/- 10 grams? or 50 grams?” he asks. “How should policy respond? What does it mean to be on the ‘safe side’ of this? The issue is further complicated by the fact that land use change carbon discharge occurs all at once, at the beginning of production, while the C02 from fossil fuel dribbles out over years. So the overall impact on global warming from fossil fuels might be less for decades, even though more carbon is ultimately released.”

“So far, biofuels have been a disappointment,” says Professor O’Hare. “It’s unclear to what degree they’ll ever play more than a niche role in our future energy picture. As usual, there is no ‘silver bullet’. If we want to save the planet, we have to change the way we live in many ways.”